Commercial property finance: Sharpen the axe

Posted On Saturday, 28 April 2012 02:00 Published by
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Whilst alternative funding mechanisms are rising to the fore, by having a good business plan in place and by following prudent steps, unlisted commercial property investors still have a fighting chance at traditional bank finance

Promising growth in the commercial property industry is largely limited to listed property funds and will not be felt by investors investing in non-listed property, so maintains Gary Palmer, CEO of asset-backed lender, Paragon Lending Solutions

Palmer said that while listed property funds were enjoying good growth at the moment, the average investor wanting to invest in commercial property was still facing significant challenges - especially in terms of the pressure on rentals, increased vacancies and reduced escalations.

"Listed funds are doing well as they have access to funding and tenants are often stronger. This is a key indicator of a good commercial property investment. However, it is much more challenging to obtain these factors in the non-listed market," he said.

Apart from vacancy issues, the size of deposits required for the purchase of a commercial property has increased over the past years, adding more pressure to investors: Whereas in the past, a deposit of 20%-25% would have been sufficient to secure the purchase of a commercial property, nowadays, buyers are required to put down in excess of 35%-40% of the price as a deposit - which causes significant problems for an investor.

Palmer pointed out that even though interest rates were at an all-time low, this was not necessarily helping investors.

"Banks used to lend at prime-minus rates. However, investors would be hard-pressed to find a bank that will lend at anything less than prime. Therefore, even though interest rates are lower, the benefits are not being passed on to the average investor," he noted.

"Alternative lenders will look at the potential future income that the property can generate, while the banks focus purely on the serviceability of the loan," he added.

Investors should seek alternative funding from second-tier lenders who could provide funding against commercial property even though the leases may be short term and may not be considered blue chip by the bank, Palmer concludes.

Sentiments about the challenges of traditional financing are echoed by Jason Lee, national manager of Rawson Properties’ new Commercial franchising division; "In most cases the toughest obstacle that a potential buyer of commercial property has to face and overcome is the procuring of finance".

But, he says, in his experience many buyers go about things in the wrong way: first they look for a suitable property, then they sign an offer for it (subject to being able to get a bond) and only then do they go in search of finance.

“This approach,” said Lee, “is a deal killer because, firstly, the time allowed to raise the money is often far too short and, secondly, they will probably not be able in the time allowed to gather together all the required documentation, without which the banks will not even look at their application.”

Abraham Lincoln, Lee reminds us, was fond of saying that if he had four hours to fell a tree, he would spend three hours sharpening his axe.

“Much the same philosophy should be applied to buying commercial property,” says Lee.

Buyers now entering this field for the first or second time, he says, must familiarise themselves with the requirements, terms and conditions that accompany an application for a bond on a commercial property.  “It is essential to ensure that your deposit is large enough and is available when needed".

“I highly recommend that purchasers put a business plan together spelling out the property details and calculating the finance they will need.”

Other documentation called for by the banks, without which an application will not even be considered, says Lee, are:

• a copy of the buyer’s identity documents;
• latest salary slips for at least three months from his current place of employment;
• his last three months non-internet banking statements on both personal and business bank accounts.  Banks do not accept bank statements printed off the internet.  This means that the buyer will have to ask his bank to print and to deliver or courier the original bank statement to him;
• an up to date statement of personal assets and liabilities (this personal balance sheet must not be older than six months from the date of application) and this should be signed and dated;
• details of any business or side line commercial activities;
• a signed and dated letter (not older than 60 days from date of application) from a registered chartered accountant or auditor confirming monthly remuneration/drawings from the business;
• the last two years audited financial statements (preferably signed and not older than 12 months from the date of application) of the business or businesses from which income is derived.  This applies to all property owning entities.

If the bond applicant can provide the bank with all this information and documentation on day one of his finance application he will give himself a fighting chance of being granted bond finance, concludes Lee.


Publisher: eProp
Source: RP/PLS

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